Saturday, 22 July 2017

Nike Can Do It — Again

After a bumpy year, Nike’s stock price has been on a roll in recent weeks as Wall Street gains confidence that the athletic apparel maker still has game.

Morgan Stanley’s Jay Sole became the latest to turn positive. Late Wednesday, he upgraded Nike (ticker: NKE) from Equal Weight to Overweight, predicting that waning North American sales may finally have bottomed. But he warns that the clock is ticking, and the “opportunity to buy Nike at the bottom of a cycle is closing.”

Nike’s stock has surged about 15% in the past month. Today’s 2.3% gain puts the stock at $59.10. Yet Sole sees Nike climbing another 15% to $68 (he lifted his price target $12 from a previous $56) by this time next year.

“As the market begins to perceive a new upcycle forming, we think the stock will rapidly draw a significant amount of investors off the sidelines who have been intrigued by the long-term Nike supply-chain innovation story, but unwilling to step in as EPS estimates have deteriorated,” Sole says.

Like many, we’ve been cautious on Nike for some time. In March, we warned that after a dismal 2016, Nike would have a hard time managing a rebound as it faced competitive pressure from a resurgent Adidas (ADDYY) and found itself on the wrong side of President Trump’s policy goals. Since then, Nike’s stock has risen more than 9%. But over the past year Nike has gained just 2.4%, compared with a better-than 13% gain by the Standard & Poor’s 500.

Attitudes are changing, thanks in part to Nike’s decision to start selling products on Amazon.com (AMZN). Also, the estimate-beating fiscal fourth-quarter results delivered late last month suggest that the company, with a three-prong growth strategy focused on innovation and more direct contact with consumers, has finally turned a corner.

For Morgan Stanley’s Sole, it’s all about the shoes. He sees the Air VaporMax, which Nike launched in March, becoming the company’s next $1 billion sneaker. In the meantime, he says North American sales growth will accelerate to a 5% clip by next quarter compared with the 2% drop expected in the current quarter.

“As Nike proves it can deliver winning product innovations and navigate the online transition, we think market fears subside and the stock’s P/E [price to earnings multiple] expands,” Sole says.

The Street sees per-share profit falling 3.2% during the current 2018 fiscal year to $2.43 a share. But next year, profit is expected to rise 15.6% to $2.81 a share.

Not everyone shares Sole’s sense of urgency. Earlier this week, Needham analyst Rick Patel started coverage of Nike with a Hold rating.

Granted, Nike’s stock has had false starts before. And if earnings growth wanes, its multiple of 21 times next year’s per-share profit could quickly contract.

However, we think that the stock can gain even more traction.
http://www.barrons.com/articles/nike-can-do-it-again-1500585999

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